(Note: This article was reserved for Goodfellow LLC subscribers until January 28, 2017, when I made it available to the general public.)
We last wrote a full research report on Valeant Pharmaceuticals International (VRX, $88.77) in January 2013. When the stock peaked on May 28, we ceased our buy recommendation on the stock. The price is currently up 39% since our January recommendation.
The stock shot upwards in late May, then formed a cup-and-handle chart pattern, which is bullish for a near-term breakout. Now that the stock price has consolidated, we are resuming our buy recommendation on Valeant shares, and would buy at any near-term price in anticipation of a breakout over $92.
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Valeant Pharmaceuticals International Inc. is Canada’s largest specialty drugmaker. Product categories include dermatology, neurology and opthalmology; featuring Solodyn oral anti-acne therapy, Wellbutrin, and Restylane dermal filler. Corporate growth is derived both from increasing product sales, and mergers & acquisitions.
In May, the company announced an agreement to purchase privately-held eye-care company Bausch & Lomb Holdings Inc. for $8.7 billion, putting the company in dominant positions in the fields of both opthalmology and dermatology. The deal will be financed by the issuance of new equity and debt.
Valeant’s long-term debt ratio is high, at 56%. The company’s CEO has expressed an interest in a “merger of equals” in order to build the company and reduce leverage.
Wall Street projects earnings per share (EPS) to grow 34%, 42%, and 18% in fiscal years* 2013 through 2015, a significant increase in growth from expectations back in January 2013.
Earnings growth is coming from a higher-margin product mix, rapidly increasing sales, and cost synergies related to acquisitions, offset in part by merger-related financing costs.
The VRX 2013 price-earnings ratio (PE) is 14.7. The PE has ranged from 5 to 26 during the company’s last six profitable years.
S&P has a Qualitative Risk Assessment of “High” on VRX stock. “Our risk assessment primarily reflects risks associated with the challenges of integrating acquisitions, achieving planned synergies and growing the overall business. Along with other branded pharmaceutical companies, VRX also faces R&D risks associated with the development, regulatory approval and commercialization of pipeline products.”
We still believe that the company’s high debt levels, and the volatile nature of the stock price, warrant investor caution. This is a stock for experienced aggressive growth investors, who should use stop-loss orders to protect profits.
The stock is trading between $82 and $92, with secondary support at $76. I expect the VRX price to rise in the near-term, based on a bullish cup-and-handle chart pattern.
* Valeant operates on a December fiscal year.
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